VANCOUVER – Colossus Minerals (TSX: CSI) has spent the last six-plus years bringing the historic Serra Pelada gold-platinum-palladium project in Brazil to the brink of production. It has worked alongside a consortium representing tens of thousands of garimpeiro miners, pulled dozens of stellar intercepts from hundreds of drill holes, achieved the raft of necessary permits, and raised more than $340 million in seven large equity financings.

It has been an arduous and expensive process. Yet now, with the mine at Serra Pelada 95% complete, a lack of money has forced Colossus to propose a debt and equity deal that could hand half the company to a New York fund for less than $20 million.

[Update: in the evening on Dec. 20, Colossus announced that it was "advised by Arias Resource Capital Fund II L.P. and Arias Resource Capital Fund II (Mexico) L.P. that the ARC Funds would not be proceeding with the two tranche financing previously announced on December 18, 2013."]

In mid-November Colossus delayed the first-production date at Serra Pelada from late 2013 to mid-2014, citing ongoing dewatering complications, and warned it needed to revise its capital and operating cost estimates. CEO Claudio Mancuso also resigned.

A few weeks later, Colossus suspended underground development work at Serra Pelada, admitting it needs another US$70 million to get the mine into production while also meeting debt obligations.

Two weeks after that, the company revealed the best deal it could find. It is not pretty.

For one, the combined debt and equity package provides only a portion of the money needed. Second, it is expensive and dilutive money. Third, it would alter ownership of the company so significantly that it requires approval from the Toronto Stock Exchange and from Colossus' other key stakeholders. And fourth, one group of those stakeholders has to agree to accept less money, and later, than expected.

That group is Colossus' noteholders, the investors who bought gold-linked notes from the company in expectation of interest payments twice a year until Colossus repaid their loans in full in late 2016. Colossus is asking their permission to delay the next three interest payments until mid-2015 and to potentially repay part of the principal ahead of schedule, which would reduce noteholders' overall returns.

The other key stakeholder is Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND), which gave Colossus $75 million for the right to buy 1.5% of the gold and 35% of the platinum produced at Serra Pelada, at set prices.

For those already invested in Colossus, the proposed debt-and-equity deal with Arias Resource Capital Fund represents a prickly situation: without the Arias money Colossus could soon go under, but to access the money Colossus has to seriously dilute its current investors and shy away from its obligations to noteholders.

The debt part of the deal would see Arias loan Colossus at least $2 million and perhaps $4 million should Colossus be unable to find anyone else to provide the other $2 million. The loan matures in just three months, but it is designed to get money to Colossus as quickly as possible.

However, the cash comes at a cost: the interest rate is 20% annually. Colossus can repay the loan and interest in shares, if its noteholders approve.

When it draws down the loan Colossus will also issue Arias up to 12.5 million warrants, exercisable at a price based on CSI's share price when the deal closes. That is expected next week, which means Arias will likely get warrants exercisable for five years at 20¢ or less.

Arias will also get right to buy up to half of any financing that takes place over the next 21 months.

The second part of the deal involves equity. Arias has agreed to buy $10 to $15 million worth of units in a private placement that will seek to raise $21 million. The units will be as cheap as possible. Colossus says units will be "priced in the context of the market but will reflect the maximum discount permitted by the TSX".

The warrants, too, will be a giveaway: they will be "exercisable at the market price of the common shares at the time of pricing of the units". In other words, the warrants will carry no pricing premium at all.

Colossus currently has 175.5 million shares outstanding, plus 8.8 million options and 30 million-plus warrants that are all currently out of the money. If Arias funds the full $4-million loan and converts that loan to shares, and buys all the units and exercises all the warrants this deal makes available to it, the fund would own almost half of Colossus.

As such it's a great deal for Arias: for roughly $20 million the fund could end up owning, indirectly, half of a brand new gold mine. It's not such a great deal for CSI investors and, in particular, the company's noteholders.

The company borrowed money from these noteholders, who in exchange expected semi-annual interest payments until being fully repaid at the end of 2016. Now Colossus is asking to shift those goalposts. At a special meeting on January 10th, noteholders will be asked to approve Colossus deferring interest payments due at the end of 2013, the middle of 2014, and the end of 2014, instead making four payments at once in the middle of 2015.

Colossus is also asking noteholders to allow it to repay some of the principal earlier than expected, once it has the means. Such a move would reduce the amount of interest Colossus has to pay on the notes, which is good for the company but erases part of the returns noteholders expected when they bought in. In a statement Colossus says these changes to the noteholder agreement are necessary because the company "is in dire financial circumstances".

Dire indeed is Colossus' need for cash, if it sees this costly transaction as its only lifeline. And even if the noteholders, Sandstorm, and the TSX all approve the deal, Colossus will still have only US$21 million of the US$70 million it needs to get Serra Pelada into production.

Nevertheless, a special committee comprised of the independent members of Colossus' board of directors endorsed the deal.

"The special committee has concluded that the company is in serious financial difficulty," Colossus wrote in a statement. "This conclusion was reached on the basis that the company does not have sufficient funds to carry out its business activities and its attempts to raise capital from a variety of sources have been unsuccessful.

"If the loan is not completed immediately and the private placement shortly thereafter, the company and its subsidiaries will not be able to meet their respective obligations, including without limitation their obligations to employees and trade creditors," the statement continued. "In addition, the company will not have the resources to pay the interest payments of approximately $3.3 million due on Dec. 31, 2013, under the notes unless the noteholders approve the deferral of the interest payment date at the meeting."

Colossus' share price was almost unchanged on the news, gaining a penny to close at 17¢. The market had already priced the company's conundrum into its share price: a year ago CSI shares were worth almost $5, two years ago they traded above $7, and in late 2010 they peaked at almost $10.

Colossus says it has spent US$90 million developing Serra Pelada to date, plus US$14.5 million in exploration spending. However, the company has burned through more than $400 million in the last seven years and Serra Pelada is its only project. Most of those funds came from equity raises, the most recent of which closed in August after raising $38 million.

Despite its advanced development stage Serra Pelada does not actually host a defined resource. After its drills encountered exceptionally high grades, such as a 2011 hit that returned 7.3 metres grading 1,494.7 grams gold per tonne, 516 grams platinum per tonnes, and 559 grams palladium per tonne, Colossus focused on underground development and bulk sampling. As a result the company never calculated a resource estimate.

Completing a resource estimate is another condition of the Arias deal.

Whoever ends up in charge at Serra Pelada will get a mine that is almost ready to go. The process plant, which includes all crushing, screening, and grinding circuits, is complete and precommissioned. The site is connected to the national power grid, and some 2.3 km of development is already complete in the underground mine. All told, the mine is 95% complete – also known as Oh so close.

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